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Equity for Wealth Accumulation

An investor asks why the dividend option is not given preference over the growth option by Value Research

I don’t understand the conviction that Value Research has regarding Dividend payout Vs Growth option in Mutual Funds. In such volatile times isn't the former better since at least the "profits" were paid out shielding one from accruing more losses as against the Growth/ where the money is once again invested in the fund. This way, at least one has some "realised" gains rather than "unrealised gains/loss" in Growth/Dividend re-investment option?
-Naga

Our conviction is not about growth option. We believe that equity as an asset class is suited only to accumulate wealth over the long-term. It encompasses maximum utilization of investment as well as gains earned from these investments. Dividend payout disrupts that.

In case of a growth option, the gains remain unrealised and can be imputed on the basis of the change in the NAV. Though periodic dividend from equity may help many investors derive psychological comfort that their investment is at work and rewarding but it restricts the gains from being re-invested. Hence, it does not constitute long-term wealth creation. If deriving periodic income from investment is your objective then equity may not be a suitable vehicle.

Dividend payout may not be the correct option to shield one from accruing more losses. In order to face volatile times we suggest periodic rebalancing, where you derive your gains by choice with a purpose. This is done by partially realising gains from profiting investments and investing the proceeds in debt so as to ensure safety of the realised gains. For investments which are making losses, we suggest investing more in them so that you buy them at low prices. It not only takes care of maintaining correct asset allocation but also gives the choice of whether to realize profits or to invest more.



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